Master circular debt
VSCircular debt occurs when an entity facing cash flow problems withholds payments to its suppliers and creditors. Thus, collection problems of one entity spill over to other segments of the payment chain, causing operational difficulties for all service providers in the sector, none of which is then able to operate at full capacity. , causing unnecessary load shedding.
The current government is unable to provide subsidies to electricity distributors due to its financial difficulties and weak economy. In turn, electricity distributors lack the funds to pay electricity producers, who are unable to buy the fuel needed to run the plants and do not supply the electricity due to customers, who often choose not to. pay their electricity bills that don’t work.
Consumers are then required to repay the taxes to the government, thus completing the cycle of debt. As the current situation shows, there is no easy solution to breaking this circle of debt and restoring electricity to the people of Pakistan. A cash injection has to happen somewhere in the circle for the money to keep flowing, but where will it come from?
The endless fiasco to contain circular debt was an example of the reasons behind the distorted system not being effectively addressed. As a result, the circular debt of the power sector reached Rs 2.5 trillion, showing a growth of 10% in the last financial year. Undoubtedly, circular debt should not be a bog for policy makers in today’s technologically advanced world.
Electricity managers at the federal level can ensure careful but sustainable circular debt reduction by adopting innovative short- and medium-term approaches to controlling electricity losses, in addition to taking long-term measures. to reduce the cost of production. to make energy affordable. Most of the losses are financial and mainly consist of electricity theft accompanied by losses from the electricity distribution companies due to corrupt and inept management.
Technical losses on lines due to poor conductors, aging network, transmission and distribution infrastructure, infrequent maintenance and resistive losses (losses due to resistance, atmospheric conditions and heat ) reached 20%. Studies reveal that Pakistan’s overall circular debt could reach Rs 4 trillion by 2025 if these technical and non-technical losses are not managed and controlled. Let’s focus on this continuing gridlock in the electricity sector.
The government’s only remedy is to raise the tariff (electricity bills have gone up 100% in the past four years). But that is clearly not working as circular debt continues to swell. As stated earlier, two things need to be accomplished: reduce transmission and distribution losses and collect close to 100% of the billed amount.
The main reasons for the government’s inability to reduce transmission and distribution losses are the insufficient attention given to upgrading infrastructure and the focus on power generation. Pakistan has attained excess generation capacity, so the focus should be on the transmission and distribution segment of the power sector. By upgrading the crumbling transmission and distribution infrastructure, the government lacks the resources to upgrade the infrastructure on its own.
Therefore, the inclusion of the private sector is imperative, which could be achieved through the privatization of DISCOs. Revenue generated from privatization could then be used for infrastructure modernization, frequency and speed synchronization of power plants and transmission and distribution (T&D) networks, improvement of conductor conductivity (cables ) and institutionalized mechanisms of system maintenance can pave the way for reducing T&D losses to a sustainable level.
In conclusion, the electricity sector and, in the long run, Pakistan needs a competitive, economically driven electricity sector, not a convoluted web of regulations, subsidies and surcharges . The government must stop “subsidizing” falsification and corrupt practices and must limit its role to that of a competent regulator.
Circular debt resolution is necessary as it will alleviate supply constraints. The task is daunting because it requires outstanding circular debt to be cleared before blocking the accumulation of circular debt. A key lesson, as discussed earlier, is that electricity subsidies can only be sustained if they are explicitly recognized in the fiscal budget; otherwise, the economy will continue to suffer from the indirect cost of these subsidies. Circular debt is a serious impediment to Pakistan’s sustained growth and development. The aforementioned reforms can go a long way in controlling the causality of circular debt.
The author is a financial analyst